What To Know About Bear Markets?
You’ve probably heard of the term ‘bear market’, especially if you have been paying attention to the stock market in the last couple of months. For newer traders, this is the first taste of an extended bear market that we’ve had in a long time (shorter market downturns in 2018 and 2020 were severe but experienced pretty immediate snap-backs). No need to worry – bear markets are a normal part of a healthy long-term market, and just because the current trend is to the downside doesn’t mean that you have to sit on the sidelines.
Bear markets are broadly defined as a 20% or more drop in equities over a two-month or longer period, and can occur right before recessions (although they don’t have to, and many times don’t). Single stocks or general markets can experience bear market periods, and since 1929 there have been 26 bear markets to 27 bull markets (although bull markets tend to be a lot more robust and last longer than bear markets, on average). Score one for the bulls!
For longer term investors, there are many different approaches to take during bear markets, but one approach that is often advocated for by professional investors is to ‘wait it out’. Over long enough time frames – 30 years or more – stock markets have generally risen, and even though during the moment it can be scary to see markets fall in sometimes dramatic fashion, it’s important to keep your goals in mind and look at things through a longer-term lens.
For shorter-term traders, however, the recommended strategies and approaches can vary. Some traders only like to participate during bull markets, some traders are comfortable taking long and short positions, and some only like to play the short side. While shorting stocks and shorting certain options can have drastic risk implications – such as potential for losses greater than account values and even unlimited losses in some trades – there are ways to structure trades so that the trade is profitable if the stock falls without an unlimited-loss risk! Using the Optionality trading platform, placing a trade that profits from a decrease in the stock price is the same process as placing a trade that profits from a stock gain. Not to mention you know what your loss potential before hitting ‘execute’.
An important takeaway is to remember that although seeing the market in bear environment where seemingly everything is being sold may be scary, it’s a normal and healthy part of the overall market structure. Whether you want to sit it out, test the waters or jump in full-on is up to you!
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